Clause 42 - Enterprise investment scheme: amount of relief

Finance (No. 3) Bill – in a Public Bill Committee at 3:15 pm on 24th May 2011.

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Question proposed, That the clause stand part of the Bill.

Photo of David Hanson David Hanson Shadow Minister (Treasury) 3:30 pm, 24th May 2011

I have a few questions on the clause, and I would be grateful if the Minister would respond to them.

Clause 42 increases, from 20% to 30%, the rate of income tax relief to which investors are entitled when they subscribe under the enterprise investment scheme for shares in qualifying companies. The new rate will apply to shares issued on or after 6 April 2011. The change was announced by the Chancellor of the Exchequer in the Budget on 23 March, subject to state aid approval from the EU. Will the Minister give an update on how that will progress with the EU, and how confident he is that they will approve the change?

What instructions have been given to officials with regard to the package of changes in this clause and clause 43, and their discussion with the EU? It has been suggested to me—though I cannot believe it is true—that the Government do not believe that most of this package will get through the EU, and that they have announced certain things that they might not get final approval for. I cannot believe that to be true, so I would welcome the Minister’s confirmation that everything announced in the Budget on 23 March will occur.

Will the Minister provide costings on the income tax relief? My assessment is that, according to Treasury information, the costing for this measure is £580 million of additional investment coming in, due to schemes, over five years. The cost to the Government, however, appears to be around £450 million, which means that we would gain a maximum of £130 million due to the influence of the clause. That £580 million will not all be new investment; some of it would have happened anyway.

I would like the Minister’s view on one more point. Before the Budget, his right hon. Friend the Chancellor of the Exchequer questioned whether venture capital trusts were simply tax loopholes; he is on record as saying that. Yet we find ourselves in a position where the Minister is extending that very tax loophole with the clause. Perhaps he could enlighten me as to how his right hon. Friend said one thing before the Budget, in which he passed certain measures, and is now extending that loophole considerably with clause 42, all—to my knowledge—without EU approval?

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 42 amends the rate of income tax relief to which investors in companies qualifying under the enterprise investment scheme are entitled. It raises the rate from 20% to 30%, and it is intended that this will apply to shares issued on or after 6 April 2011, subject to state aid approval, which I will come back to in a moment.

The enterprise investment scheme is designed to encourage investment into smaller, high-risk companies by offering a tax incentive to investors in qualifying companies. It has been in operation since 1994, with around £7 billion from private investors being contributed to qualifying companies. It is recognised as a successful scheme, and the Government intend to build on that. Small businesses are the lifeblood of the economy, and the ability to start and grow companies is vital for the country’s economic well-being. That is particularly the case now, given the need for a private sector-led recovery. The Government wish to encourage investment into start-up and small, growing companies. The plan for growth, published alongside the Budget, sets out our ambition to make the UK one of the best places in Europe to start, finance and grow a business. The reforms to the EIS and the VCT scheme announced in the Budget will help the Government to achieve that ambition.

The Government recognise that higher risk companies struggle to attract external sources of finance, and that private individuals need an incentive to invest capital in them. The current level of incentive at 20% of the amount invested up to a maximum of £500,000 a year, has produced a significant amount of investment over the existence of the scheme. The Government want that  amount to grow and are offering a greater incentive for individuals to invest by increasing that relief from 20% to 30%. Those changes will be introduced through a Treasury order once state aid clearance has been granted.

It would be illegal to introduce changes without state aid approval, but we have already submitted notification of the changes to the European Commission and are currently waiting for its response. Once that has been received, the rate increase will apply to investments made after 6 April 2011. We believe that state aid approval will be received—we see no reason why not—and the scepticism of the right hon. Member for Delyn about the likelihood of that happening is not well placed. We want to increase the relief to 30%.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

As the measure will be introduced by order, will the Minister indicate when he expects that to happen?

Photo of David Gauke David Gauke The Exchequer Secretary

I cannot say much more than that we will introduce the order after we have received state aid approval. If he is asking when I expect that to happen, I hope that it will be relatively soon. I do not want to place a date on that at the moment as I am not in a position to do so. The matter is not in our hands. We are currently waiting for the response, and I hope it will arrive in due course.

The right hon. Gentleman asked whether the arrangements, particularly VCTs, encourage tax avoidance. We do not believe that to be the case, but the Government will continue to monitor the operation to ensure that investment is properly targeted. As we announced in the Budget, we want to ensure that the scheme is targeted at genuine risk capital investments, and in the context of the other steps that we are taking to make the UK an attractive place in which to do business. That is a sensible approach. We will continue to work with industry representatives to ensure that schemes operate in a satisfactory manner, and with the European Commission on the expansion of the scheme. In conclusion, the increase in the rate forms an initial part of the Government’s drive to encourage the entrepreneurship and risk taking that is vital to the country’s economic growth.

Question put and agreed to.

Clause 42 accordingly ordered to stand part of the Bill.